Great Expectations in the String Instrument Trade?A Matter of Margins and Guarantees

Consumers are frequently shocked by gross profit margins that are normal for retailers. A downtown department store buys a pair of socks from an overseas factory for 15% of the eventual full retail sales price. Your local specialty coffee shop pays less than 25% of the retail price for its coffee and the big chains pay far less than that!

So it is in the string instrument trade. A successful full service retailer will normally try to buy at 50% of the retail price or less. They will offer instruments and bows on consignment and expect anywhere from 30% to 10% of the retail price as a commission, depending on the price range and the circumstances of the transaction.

One might think it would be easy to go into the retail string instrument business, buy and sell a couple of $6 million violins as well as numerous lower priced items, reap huge profits, and retire to the Cayman Islands. The informed consumer would do well to understand why it does not work that way: The key is to understand the difference between gross profit and net profit, and the relationship between time and money.

Gross Profit is overall profit before expenses are deducted. Profits out of view of expenses can appear large. In the absolute best case scenario, the local coffee house can sell 500 latte drinks per day at $3 they have gross sales of $1,500 against food costs of $375, for a gross daily profit of $1,125.

Monthly gross profit of $33,750 (30 days @ $1,125.00 per day) sounds like a huge winning venture until one considers the other expenses: labor @ $400 per day (manager/skilled labor @ $20 per hour and entry level labor @ $9 per hour), rent @ $6,000 per month, amortized startup costs @ $6,000 per month ($300,000 @ 8% for 5 years), marketing costs @$1,000 per month. For purposes of this exercise we will leave out payroll taxes, sales tax, business licenses and health department certification, depreciation on equipment, and other items all of which figure significantly into the net profit picture.

So the coffee venture which looked so good just a paragraph ago now can be seen to be achieving a net profit of less than $8,750 per month ($33,750 gross profit minus $25,000 of expenses per month) under the absolute best of conditions. This is the reward that the owner reaps for having intelligently risked $300,000, and having worked 70-hour weeks for many months at no salary bringing the venture forward! If the shop succeeds at the maximum sales level for 6 years the startup costs will be covered and the owner will have a very strong income-producing engine. If the venture fails the owner has a nasty financial crater. For well-run businesses, normally something in between happens; the shop has good weeks and bad weeks and slowly ekes out a niche for itself, and over a very long period it rewards the owner. Not many people are willing to entertain such a risk to reward ratio and it is easy to see why the seemingly large gross profit margin is essential to the success of the business.

Similarly, in the string instrument trade there is an important distinction to be drawn between gross and net profit. The full service retailer takes on a high degree of risk with such a venture in the form of lengthy leases on property, build-out of a space, technical equipment, a commitment to meeting payroll for employees, providing employees with benefits, all of which create superior service and market access for consumers. Further, the string instrument retailer takes on these risks in a climate of extreme variability of volume of sales, and against a sometimes-hostile consumer who perceives profit as potentially usury. And then there are the implicit guarantees! No other industry has anything like the guarantees that are so often expected by string instrument consumers: some are normal and reasonable such as guarantees that the instrument is being accurately represented and fairly priced. Abnormal and debilitating expectations are guarantees that the consumer can trade in the instrument against another at full retail value, guarantees that the market price will continue to rise, guarantees that the consumer will be able to sell at a hefty profit when the time comes, and the expectation of a buy-back policy.

When all these factors are considered, being a string instrument retailer is exposed as a risky and difficult venture. If occasionally a dealer can buy something low at auction and achieve a large profit margin this could be considered an offset for the money they lost staying in business through a slow quarter. For the retail consumer profit is often a dirty word, but this is short sighted. Even for a skilled and connected retailer market access can be difficult to achieve. Without incentives no business would happen and consumers would ultimately suffer while business people moved into more profitable areas of commerce. In any case it is human nature to buy as low as one reasonably can, and sell as close to market price as one can. Who buys a little painting at an antique store for $100, takes it to the “Antiques Road Show” and has it appraised for $50,000 and then sells it again for $200 because that is enough profit?

This is not to say that there is not abuse in the string instrument trade. The abuse is not a matter of large gross profit margins, but rather a matter of misrepresentation. The misrepresentations can be around authenticity, condition or value but in any case the consumer loses when there are misrepresentations. A useful instrument dealer is a successful dealer who sells authentic instruments, accurately represented at fair market prices, will fully support instruments they have sold at the prices sold, can provide ongoing help with the skilled labor associated with set-up and adjustment, and runs a solid enough business that one has reasonable assurances that it will still be there business when you need it next. The fair dealer will inform customers accurately as to values, either buying or selling although the normal consumer failure to distinguish between gross and retail profit has led to a lack of transparency in the industry around these issues.

So just as so many willingly patronize their local coffee shop despite the enormous gross margins, don’t be afraid of the profit that a string instrument dealer will take out of a transaction. Instead beware of the dealer with limited expertise, and too-good-to-be-true promises that have the consumer reaping all of the benefits. Look for sensible dealers with integrity, and the kind of business sense that bodes well for their future in the business.